U.S. Economy Expected to Bounce Back in Second Quarter

The U.S. economy, which nearly stalled during the first three months of the year, got a big boost in the quarter that just ended as businesses built up inventories, but growth looks set to fall back quickly.

The economy grew at a sluggish 0.7% annual rate during the first quarter, the slowest in more than four years, as business cut bloated stockpiles and Americans imported more foreign goods and services.

Economists agree the climate during the April-through-June quarter of this year was much different. But that stronger growth will likely yield to a more-modest expansion over the rest of the year.

"After a bounce-back in Q2 we expect GDP growth to revert to its recent low 2% pace in the second half of this year and into 2008," Lehman Brothers chief economist Ethan Harris wrote in a recent report.

A swelling trade deficit and an inventory correction during the first quarter together shaved nearly two percentage points off growth in U.S. gross domestic product. The trade gap now looks to be narrowing and inventories are on the rise.

"You are getting part of this sense that the economy is heating up from these temporary factors but income growth has slowed and consumer spending growth has slowed," said Ken Mayland of ClearView Economics in the Cleveland area.

Consumer spending, which fuels about two-thirds of economic growth, was strong during the first quarter, but higher costs for food and energy have cut into buying power and will likely weigh on spending for some time.

Disposable personal income, which adjusts for both inflation and taxes, declined in April and May, according to the latest Commerce Department data. Real weekly earnings also fell.

"Oil and gasoline prices are likely to surge this summer and the ethanol program is playing havoc with food prices ranging from baked goods to meats and milk," said Peter Morici, a business professor at the University of Maryland.

While gasoline prices have edged down in the past few weeks, U.S. consumers shouldn't expect a lot of relief. The Energy Department forecasts that pump prices will average $3.05 a gallon during third quarter -- close to record highs -- and $2.65 in the final three months of the year.

Housing Market Woes

Trouble in the housing market is not expected to let up any time soon either and will continue to weigh on growth through this year and into next, economists say.

Rising inventories of unsold homes, declining home values and a heavy volume of subprime loans whose interest rates will soon be reset higher are all factors the economy will have trouble shaking off.

There is little evidence that the housing sector will improve soon.

Government data Friday showed spending on private residential construction projects has been down for 15 consecutive months.

With new home sales falling and the volume of unsold homes rising, the confidence of home builders hit its lowest level in more than 16 years in June, according to a National Association of Home Builders' survey.

Existing homes sales have tumbled as well, pushing inventories up to a 15-year high.

While the economy is lumbering ahead under the weight of the slumping housing market and lofty gasoline prices, it is not expected to crumble.

The labor market remains relatively strong and wage growth has been steady. This, in turn, should keep the economy chugging ahead, albeit at a moderate pace.

"Drag on growth has been a bit deeper than we expected and now, post the subprime mortgage shakeout, looks set to cast an even longer shadow on the economy," Lehman's Harris wrote. "We do not see the housing recession pushing the overall economy into recession."